Inseego Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

There are 4 speakers on the call.

Operator

On the call today are Phil Brace, Executive Chairman of Inseego's Board of Directors and Stephen Gadoff, the company's Chief Financial Officer. During this call, certain non GAAP financial measures will be discussed. A reconciliation to the most directly comparable GAAP financial measures is included in the earnings release, which is available on the Investors section of the company's website. An audio replay of this call will also be archived there. Please also be advised that today's discussion will contain forward looking statements.

Operator

These forward looking statements are not historical facts. Rather are based on the company's current expectations and beliefs. For a discussion on factors that could cause actual results to differ materially from the expectations, please refer to the risk factors described in the company's Form 10 ks, 10 Q and other SEC filings, which are available on the company's website. Please also refer to the cautionary note regarding forward looking statements section contained in today's press release. With that, I'd like to turn the call over to Phil Brace, Executive Chairman of Inseego.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. It's a pleasure to be here. I'd like to cover 3 topics with you today. 1st, I'd like to give you a quick summary of the Q1 results. 2nd, I'd like to share some thoughts on our capital structure.

Speaker 1

And 3rd, I'll provide some high level view of the current quarter and focus areas ahead. I'll then turn the call over to Steven and we'll wrap up with some Q and A. Q1 2024 was a solid quarter for Inseego. Revenue came in at $45,000,000 above our guidance and helped by strong year over year growth in our FWA business. Q1 adjusted EBITDA came in at $3,800,000 which was also better than expected and was driven by higher gross margin and lower operating expense.

Speaker 1

During the quarter, the sales organization launched a new channel program, which is an important part of starting to diversify the company's revenue base and expand our go to market capabilities. We are already starting to see opportunities developed there. Finally, the company also secured a significant renewal of its subscribed management platform at a major Tier 1 carrier customer. As I mentioned on the last call, addressing our capital structure is significant focus for the company and the Board. While we still have much work to do, the company's improved financial condition and business results give us confidence that there is a solution.

Speaker 1

Of particular note, we ended the quarter with more than $12,000,000 in cash, which along with a $15,000,000 prepayment on the subscribed management platform renewal allowed us to repay our expensive ABL in April. As noted in the press release, the termination of the ABL decreases our interest expense meaningfully. Importantly, it also now provides us with the capacity to entertain other capital structures like secured debt that will give us flexibility in terms of our ultimate capital structure and how we seek to restructure the existing convertible notes. The majority of the convertible notes are closely held and we are working on developing an acceptable solution. The Board is taking a deliberate methodical approach and we are engaged with our legal and financial advisors.

Speaker 1

We will keep investors updated over the coming quarters as we continue to make progress. With that, I'd like to turn briefly to our CEO search progress. The interest has been robust and we have identified a number of qualified candidates. Having said that, we are being thoughtful about moving forward, particularly as we navigate the important capital structure considerations I just talked about. Looking at the business, the outlook for the quarter is for continued growth in revenue and profit.

Speaker 1

We are seeing good demand for our FWA business and we are starting to see a rebound in the mobile business. We are looking ahead to the back half of the year and beyond as we're also building a number of exciting new product and software opportunities in both the carrier and the MSO space based on the strength of our roadmap. With that, I'd like to thank the team at Inseego who work every day to make these things happen. I'm glad to take any questions in a few minutes. Right now, I'd like to pass the call over to Steve.

Speaker 1

Thanks, Phil. Good afternoon, everyone. I look forward to covering 3 things with you today. First, I'll take you through the Q1, 2024 financial results. 2nd, I'd like to address some new language that the accounting rules require we have in our 10 Q that's getting filed tonight.

Speaker 1

And 3rd, I'll provide some color on the business and our guidance for Q2. As Phil noted, we'll of course wrap up by opening the call to your questions. With that, let's start with our Q1 results. Total revenue came in above guidance and $2,200,000 or more than 5% higher sequentially at $45,000,000 Overall, performance in the FWA product both sequentially and year over year and growth in our telematics and subscriber management platform offerings all contributed to better than anticipated revenue performance on a general uptick in demand and sales execution in the quarter. As we've talked about previously, while we expected Q1 mobile hotspot revenue to be down on the transition of the 4 gs product end of life in the previous quarter, the mobile hotspot business came in ahead of expectations in Q1 on carrier uptake of our 5 gs products.

Speaker 1

FWA also saw good carrier demand in Q1 that drove year over year revenue growth of nearly 20%. The higher growth, higher margin FWA product now constitutes about a third of the company's revenue, up from 23 percent in the same quarter of 2023. Looking at services and other revenue, as I mentioned, the telematics business came in ahead of expectations and at its highest quarterly revenue ever on good continued demand in the business. In addition to the Telematics contribution to growth, Q1 revenue from our subscribed SaaS offering also came in ahead of expectations and was up sequentially over Q4. As Phil mentioned, we were pleased that one of our key carrier partners signed a new deal with us during the quarter.

Speaker 1

It began on April 1 provides Inseego with increased revenue and profitability for the next 2 years as we manage the investment and growth in our FWA and Mobility businesses. Moving on to gross margin. Q1 gross margin percentage came in at 38.7 percent on a non GAAP basis. This was among the highest level in 7 quarters and like the prior quarter in Q4 was impacted by some one time items. Product gross margin benefited from a one time pickup from components rebates, while services and other margin was lower on a higher proportion of professional services revenue in the subscribe business in Q1 that we don't expect to continue going forward.

Speaker 1

Looking at non GAAP operating expenses, Q1 came in favorable to Q4 and in line with expectations. Sequential efficiencies in R and D and reductions in depreciation and amortization expense were partially offset by executive severance costs and G and A in the Q1. We continue to take a disciplined approach to managing our spend across the organization favoring pipeline and revenue generating sales and marketing spend and differentiation oriented R and D spend. Also of note, insofar as overall expenses in Q1, for the first time in several years, the company's P and L contains accrued expense for incentive bonus plans for the company's employees. Previously, no such incentive was accrued or paid.

Speaker 1

With Inseego's improving operating performance, growing profitability and increasing free cash flow, we're pleased to be able to return to more market based compensation arrangements for the terrific group of employees that are driving the turnaround here in the business. Putting this all together, the favorable revenue performance and more focused operating expense resulted in Q1 adjusted EBITDA coming in higher than anticipated at $3,800,000 a margin of nearly 9% and the 5th consecutive quarter of positive adjusted EBITDA. Wrapping up our Q1 results with the balance sheet. Cash improved meaningfully from year end coming in at $12,300,000 at March 31. And while we had $4,700,000 drawn on our credit facility at the end of Q1, as Phil mentioned, we voluntarily paid that off and terminated ABL facility in April.

Speaker 1

Additionally, the combination of the $15,000,000 upfront payment on the subscribed renewal in April 2024 and our improving financial profile has provided the company with the liquidity on hand to finance our working capital needs going forward. With that, I'd like to move to my second topic today and call out some new language that's going to be in our 10 Q that's getting filed tonight that relates to the accounting rules around our outstanding convertible notes. As you heard Phil say, we're being methodical and thoughtful about how we move forward to achieve an outcome that's optimized for our stockholders and relevant stakeholders in restructuring and refinancing the convertible notes. With the maturity of the notes now technically being 1 year out in May 2025, the accounting rules dictate that we include wording in our 10 Q that's typically referred to as going concern language. Because while we are engaged with our bondholders to restructure and refinance the notes, we cannot be 100% assured that the desired restructuring and refinancing will be accomplished.

Speaker 1

It shouldn't go without noting that Inseego is in a positive and fairly uncommon position in including this required accounting disclosure. We're profitable on an adjusted EBITDA basis. We're free cash flow positive. We don't need any financing for operations and we're continuing to improve our near term liquidity. With that, let's turn to the 3rd discussion topic on what we see in the current quarter.

Speaker 1

On product revenue, there are 2 drivers of higher revenue in Q2 over Q1. First, we're seeing strong carrier demand for our mobile products from a combination of increased structural demand as well as some more perishable in quarter promotions at one of our carrier customers. 2nd, we're continuing to see growth in FWA in Q2 on early traction from the Q1 re launch and rebranding of the Inseego channel program, Inseego Ignite. Services and other revenue is also seeing sequential revenue growth in Q2, driven by the increased revenue from the subscriber renewal that's adding a combination of SaaS subscription expansion and additional professional services revenue. Pulling this together, Q2 non GAAP gross margin percentage is expected to be down slightly on product mix as the high margin subscribe revenue is offset by an even greater increase in the lower gross margin mobile revenue.

Speaker 1

Q2 non GAAP operating expenses are expected to be relatively flat on a dollar basis over Q1. And so considering all this, we're providing the following guidance for Q2 2024. Total revenue in a range of $52,000,000 to $56,000,000 and adjusted EBITDA in a range of $6,500,000 to $7,500,000 In closing, we're pleased with the results that we delivered in Q1 and we're encouraged by the several positive dynamics going on in the business that are driving greater revenue and profitability in Q2. With that, we appreciate your time and support And we're glad to open the call for questions. Operator?

Operator

We will now begin the question and answer session. Our first question comes from Tore Svanberg with Stifel. Please go ahead.

Speaker 2

Yes, Thank you and congratulations on the continuous progress here. So my first question is on the Q2 guidance. So just from a mix perspective, just so I understand this, so product revenue obviously up, but carrier up more than fixed wireless. And then what were some of the moving parts on the services again, please?

Speaker 1

Sure. Pedro, it's Steven. So what we talked about was that the subscribe renewal is coming in and we were successful in negotiating a higher revenue for that. And so in services and other, the subscribe business that's driving the bigger increase in revenue on that piece. And as you said, in product revenue, we talked about increased revenue coming from both mobile and FWA.

Speaker 2

Great. And as my follow-up, this sort of new language that's coming into 10 Q, so is this sort of a recent accounting rule change? Or was this kind of more you were notified about this is just typical language that you have to include?

Speaker 1

Yes, neither of those we were not notified at all. It's really a self reporting and description in the footnotes of the financials. And it really is the standard, if you will, accounting requirement for what they define as a going concern. And so they look to say, okay, you're 1 year out from the maturity of the notes, the $163,000,000 of notes in the capital structure. And so because those are now within 1 year, they're considered current.

Speaker 1

And so if you look technically at the cash balance, it's not $160,000,000 And so that requires triggers the disclosure of that language, the going concern language because of the capital structure.

Speaker 2

Sounds good. Actually just one last one. You mentioned telematics revenue reaching a record this quarter. Is that business expected to be up as well in the June quarter or will it take a breather?

Speaker 1

Probably more of the latter. We were pleased that in the Q1 it did nicely coming off of 2023. But our expectations are that it kind of considered continues at a consistent approach.

Speaker 3

Great. Thank you.

Operator

The next question is from Lance Vitanza with TD Cowen. Please go ahead.

Speaker 3

Hi, thanks guys. And first off, congratulations, great quarter. I guess, let me just start with the Q1 and we'll get to the guidance in a second, but revenue was up 5% sequentially. I assume that's the right way to analyze revenue growth at this stage. And so I'm just wondering if there's anything unusual there from a timing perspective either I'm guessing not pulled forward given the guidance, but perhaps that got pushed out of the Q4 of last year and into the Q1?

Speaker 1

On what piece specifically, you mean in general?

Speaker 3

On revenue, yes.

Speaker 1

Yes. The short answer is no. There was nothing meaningfully that got to both your good points and questions, nothing meaningful that got pushed from Q4 into Q1 and nothing that got pulled from Q2 into Q1. It was a pretty in quarter demand gen and execution quarter.

Speaker 3

Okay. Okay, great. And then so on the 2nd quarter guide, right, so it's 20 percent sequential growth at the midpoint. And I'm wondering how much of that is an artifact of the prepayment that you took in, in April. I assume that you're not recognizing the 15,000,000 it's a prepayment, right?

Speaker 3

So how much of that 15,000,000 are you recognizing in the Q2? And then can you give us just at least a rough feel for how quickly the rest of that prepayment will be recognized as revenue over the balance of the year going forward?

Speaker 1

Sure. The easy answer, 0. So it just affects cash. We had more cash on hand, which was helpful. That contract is basically taken straight line ratably over the 2 year period.

Speaker 1

So the fact that we had prepayment upfront has zero impact on the P and L, on revenue recognition. It's or you guys ratably over the period.

Speaker 3

Okay, great. So then I guess my question is, you've got how much confidence do you have in the visibility of revenues at this point? And what's changed? Because it wasn't that long ago and I know this predates you, but that it wasn't that long ago that the leadership of this company was fairly adamant that they had virtually no visibility.

Speaker 1

Yes, it's a fair and understandable question. I mean, and Phil and I will tag team on it a bit. But the news on guidance looking at Q2, the quarter we're in, as we said, we are bullish on the business itself on the product business specifically. There's a lot of activity going on in the second half of the quarter kind of right now, which is why you see us saying, okay, there's some demand that we think it looks potentially perishable, meaning it's in quarter promotion. And the big question is going to be as we, some of the new team and others, as we evolve the business increase in the channel program and how well they've done, how much of that is sustainable growth in Q3 and Q4.

Speaker 1

So right now, we're not being presumptuous on what we think we can do. We're encouraged right now. And so the visibility comes because I think and we'll tag team on this, it's a combination of increasing demand and longer term, so that helps by definition. And then also, our view is there's just a different rigor and cadence in the business. Steve Harman and the sales team track the business differently, everything is in sales force.

Speaker 1

We have pipeline review calls where we talk about what Q3 and what Q4 look like now. And so there's just a different construct of how we look at the business than perhaps was here a year ago with different folks. So that's certainly part of it and it's probably a bit of an uptick in demand in the market. And then I guess

Speaker 3

Go ahead. Sorry, please.

Speaker 1

Yes, no problem. I mean, I think just in general, look, we're seeing strong demand across the board from our FWA products. Stephen mentioned we've got some promotional activity that we're trying to take advantage of. They came when the sun shines for the quarter. So I think we've got some of that we're trying to take advantage of.

Speaker 1

And the subscribe renewal helps us well. So this is a situation where we had some bit of a tailwind given by some of our strong product roadmap. The customer acceptance has been good and we'll just go from there.

Speaker 3

If I could just squeeze one more in before I jump back in queue. The fact that this carrier was incentivized to give you a $15,000,000 prepayment that suggests to me that the pricing trends that you guys are seeing are most likely in your favor perhaps escalating prices over time. Is that perhaps escalating prices over time. Is that a reasonable read or were there some other factors that we're not privy to behind the scenes that might have driven that prepayment? Thanks.

Speaker 1

Look, I think that I mean, you'll see the effect of that particular renewal in our financials. And so you can make assumptions about what that is. But in particular prepayment, honestly, we work very closely with this customer for many years. This product has been embedded for a long time. And it was one facet of a multifaceted negotiation and we were able to successfully negotiate.

Speaker 1

So that's I wouldn't read too much more into it than that.

Speaker 3

Thanks very much.

Speaker 1

Thanks, Ben.

Operator

Next, we have a follow-up question from Tore Svanberg. Please go ahead.

Speaker 2

Yes, thank you. Phil, I had a question on the channel program. This is obviously something that's going to diversify the revenue base. Could you talk about what some of the areas that you are targeting from that program? And also from an OpEx perspective, what does that program necessarily mean?

Speaker 2

I obviously assume that's already included in your 2Q guidance, but even beyond that, would you have to invest more OpEx dollars to get that program up and ramping?

Speaker 1

Yes. Let me try the best to answer that and Stephen can jump in here if I'm wrong. So look, what we're trying to do here, historically, the company has say the revenue profile of the company has been dominated by very large carrier customers and we're very thankful to have them and they mean a lot to us and it's an important part of the business for us obviously. Also for our own duty perspective, we need to diversify that revenue base. So we're not as dependent on those large customers.

Speaker 1

And so some things that happens there, they tend those customers tend to be focused on more specialized higher value solutions where we're part of solution. And frankly, the sales team has an experience. Some of the new sales team that we're bringing on has experience in building programs around that. And that's going to be part of our revenue diversification strategy going forward. With respect to additional costs, we're at our goal is to actually reallocate existing capital to fund that, self fund that.

Speaker 1

So I would not expect any significant change in our cost profile as a result of doing that. We're choosing where we spend the money.

Speaker 2

That's great perspective. Thank you.

Operator

Next, we have a follow-up from Lance Vitanza. Please go ahead.

Speaker 3

Hey, thanks guys. Thanks for letting me jump back in here. I wanted to ask you about cash balance at the end of the Q1. So before the prepayment came in, you are you'd put up $12,000,000 of cash, which was actually recognizing it's not a lot in absolute dollars, but it was well ahead than we had estimated. And I'm just hoping you could maybe explain that the beat in your cash at the end of the quarter seemed considerably larger than the beat in EBITDA.

Speaker 3

We're pleased to see both. But so I'm guessing that you had some favorable working capital inflows in the Q1. Is that correct? And if so, will those reverse later in the year? I'm just thinking about how we should model your cash flows from here on out.

Speaker 1

Yes, that's right. I think essentially recall the conversation we had from Q4, where the cash flow at year end and the cash balance was a little bit lighter. And so there's a view that that was a timing difference between Q4 and Q1. If you look at the 2 together, it's pretty consistent quarter to quarter. And so, one, we expect a bit of an uptick in Q2 as you would suspect with the core business growing and the EBITDA and profitability growing.

Speaker 1

And then we'll see what happens in the back half of the year, but we expect it to be consistent.

Speaker 3

Great. Okay. Thank you.

Speaker 1

Yes, sure. Good question.

Operator

This concludes our question and answer session and it concludes our conference. Thank you for attending today's presentation. You may now disconnect.

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Inseego Q1 2024
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